Omicom’s ‘Very Skilful Financial Engineering’: UK Newsletter

12 June 2002

Omnicom Group’s woes following the recent resignation over the so-called ‘Seneca affair’ of Robert Callender, the director heading its audit committee [WAMN: 10-Jun-02], have been exacerbated by accusations published in New Media Agencies Financial Intelligence, a UK-based newsletter.

Edited by Bob Willott, a senior partner in Willott Kingston Smith, an accountancy firm specialising in marketing industry matters, the newsletter opines that Omnicom used “a clever ploy” to avoid taking a hit in last year's accounts for the “massive” losses sustained by internet companies in which it had invested.

Willott alleges that in May last year, Omnicom struck a deal with leveraged buyout financier Craig Cogut, via which its internet investments were diverted into Seneca, a jointly-owned investment company, in exchange for non-convertible preferred stock – a labyrinthine deal that avoided the need for Omnicom to take a write-down.

While Willott makes no suggestion of impropriety or rule-breaking, he views the Seneca arrangement as “very skilful financial engineering” which, although in some respects is to Omnicom’s credit, should have been made more transparent to the investment community.

In the post-Enron/Andersen climate, the financial world is especially jittery over dealings of the Seneca ilk and the subsequent allegations by Callender - a member of its own board - of less than full disclosure. These have impacted on Omnicom’s share price which fell 16% last week, although recovering slightly in the past few days.

Additionally, some onlookers question whether the advertising group’s method of accounting for organic growth is overly aggressive. They point to Omnicom’s recent claim that its underlying revenues had risen by 8.5%, despite the estimated 5% fall in worldwide advertising and marketing revenues over the same period.

The questioners use as an example a hypothetical case of a company acquired on June 30 with full year revenues of $100m: if under its new owner those revenues increase to $105m in the first full year, how much underlying growth should the new owner report, they ask?

One analyst maintains that Omnicom counts as organic growth the difference between the $50m contribution in the first year and the $105m in the second year. But yesterday (Tuesday) this was robustly denied by ceo John Wren and dismissed as “just nonsense that my competitors or short-sellers are putting about”.

Wren insisted in the first full year of acquisition, Omnicom would take $5m of the $105m of revenues as organic growth and $100m as acquisition-related. But alongside WPP Group, currently number one in the ad world ratings, this is still highly aggressive. WPP does not count any growth as organic until it occurs after the first anniversary of the acquisition.

Wren disagrees, insisting that Omnicom's method is the more conservative because it allows for the effects of declines in revenues from new acquisitions as well as increases.

Data sourced from: Financial Times; additional content by WARC staff